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The final version of the Foreign Account Tax Compliance Act was finally released last week by the US Department of the Treasury and the Internal Revenue Service in their efforts to combat tax evasion.

Since the rules were signed into law by President Barack Obama two and a half years ago, the US has released drafts and proposals for the text of its controversial new rules known as Fatca. Last Thursday, all 544 pages were published on the Office of the Federal Register website.

Here Financial News brings you up to speed on the wide-reaching and what some in the financial industry call “burdensome” rules.

1) Why Fatca is needed
Tax evasion costs the US economy an estimated $100bn a year, in part due to individuals hiding money in offshore accounts.

2) How much Fatca is expected to raise
The US expects the Foreign Account Tax Compliance Act to raise $7.6bn in tax revenue for the IRS over a 10-year period.

3) How it works
Fatca requires that global banks and financial institutions, called “foreign financial institutions”, register with the IRS and promise to identify, collect and report information on US clients’ offshore bank accounts. Registration will take place through a web portal.

According to consultant KPMG, entities must register by October 25, 2013, in order to be included on the IRS’s list of compliant institutions in December 2013.

4) Who does Fatca apply to?
Fatca applies to global banks and institutions that have clients linked to the US with more than $50,000 in an account. That includes banks and fund managers and also custody banks, which are arguably in the best position because of the sheer volume of data they hold on behalf of clients. The legislation applies to any entity which has US clients on its books.

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However, there are a couple of caveats: An institution is “deemed compliant” (and, therefore, in no need to conform to the reporting regime) if it is not likely to have US investors or poses a low risk of having US investors – such as a pension fund.

5) The penalties for not registering
While the rules may seem like a hassle to implement, and costly, the Treasury and IRS have put an incentive in place: any non-US entity that does not comply with the rules will be forced to withhold 30% of any US client income. Similarly, institutions that are not on the December 2013 participants list may have to withhold 30% tax on new accounts or contracts when the general withholding requirements kick in, on January 1, 2014.

6) How a US client is defined
Consultants have been raising questions over who the rules actually target. In the simplest terms, if you have account holders who are US taxpayers and should be paying tax to the US government, then you are caught in Fatca’s net.

Tim Winter, head of the US competence centre for private bank Coutts, said some clients may not even realise they are caught up. He said: “With all US citizens and residents affected, and potentially non-US clients that appear to have US connections, it is vital they seek financial advice now so they are aware of the personal impact of Fatca."

7) What is an IGA?
In order to facilitate and ease the burden on financial entities, a number of countries have embarked on so-called intergovernmental agreements, or IGAs – that is, a framework between the US and a country’s own government about how to implement the rules.
There are two models for IGAs: one will see institutions report directly to the IRS on their clients; the other agreement means institutions will report to their respective governments, who then exchange that information with the IRS.
So far, the UK, Mexico, Denmark, Ireland, Switzerland, Spain and last week Norway have signed or initialled model agreements. The US Treasury is working with more than 50 countries and jurisdictions to implement Fatca.

8) What about the countries that have not signed IGAs?
They still have to comply – it might just be a bit more difficult. Jennifer Sponzilli, US tax partner at KPMG, said: “The Fatca final regulations make clear that the registration must be completed for all FFIs [foreign financial institutions], within and without IGA countries.”

9) What about sub-funds?
This remains unclear, consultants say. The IRS and Treasury have not provided clarity on whether, when registering specific funds, the umbrella fund suffices, or whether each sub-fund must be separately registered.

10) Will financial institutions withdraw from the US client market?
Potentially. Rumours in the market say that some fund managers and banks might refuse to accept US clients. Others, however, are adapting to comply with the new rules.

Jane Mumby, co-head of Coutts’ Americas team, said: "While some financial institutions are looking at withdrawing from the US client market due to the associated risks and complexities that can come with new regulation, we are ready to embrace these changes.”